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Tax-Free Savings Account (TFSA)

Navigating the plethora of investing possibilities in the realm of wealth management can be difficult. One stands out, though, due to its distinct tax benefits and adaptability: the Tax-Free Savings Account (TFSA). We'll go into the specifics of TFSAs, including their advantages, and discuss why our company thinks they're an essential part of a complete financial strategy.

What is a Tax-Free Savings Account (TFSA)?

The purpose of a TFSA is to allow Canadians to save money without having to pay taxes on the interest, growth, or investment income they make. This effective financial instrument, which was first released in 2009, enables you to invest after-tax income and see it grow tax-free. This effective financial instrument enables you to invest after-tax income and see it grow tax-free. Also, you can invest in a variety of assets, including stocks, bonds, mutual funds, and more, and you can withdraw money without paying additional taxes.

Why We Use TFSAs:

Our business is of the opinion that TFSAs are necessary for a comprehensive financial plan for a number of reasons:

  • Tax efficiency: A TFSA's tax-free status is one of its main advantages. Any growth or revenue that is produced within the account is not subject to taxation, and there are no additional tax implications when you withdraw money. Because of this, the TFSA is a very effective investment tool for reducing your tax liability.
  • Flexibility: TFSAs give you the greatest amount of freedom when it comes to investing and using your money. There are numerous investing alternatives available, and there are no limitations on when or how much you can withdraw. This makes TFSAs ideal for achieving both short- and long-term financial objectives, such as saving for a down payment on a home or creating a retirement nest fund.
  • Contribution Room: The Canadian government establishes a new annual contribution cap for TFSAs each year, allowing you to put more money to your account. If you don't use all of your contribution room in a given year, it carries over indefinitely so you never lose the chance to maximize your tax-free savings.
  • Estate Planning: TFSAs can play a significant role in estate planning because they can be handed on tax-free to a spouse or common-law partner. This makes sure that even after your passing, your loved ones will continue to enjoy tax-free growth and income.
  • Emergency Fund: TFSAs make the perfect emergency fund because there are no fees associated with withdrawals from them. In times of need, you can simply access your money without worrying about the effects on your taxes or sacrificing your long-term financial objectives.

The unrivalled tax efficiency, flexibility, and adaptability that TFSAs provide make them an essential part of any wealth management strategy. Our firm truly believes in the ability of TFSAs to assist our clients in reaching their financial objectives while reducing their tax liability. Please don't hesitate to get in touch with our team of knowledgeable advisors for specialized advice and help if you're curious to find out more about how a TFSA can benefit your financial strategy.

Frequently Asked Questions (FAQs)


What products can a TFSA hold?

One of the key benefits of a TFSA is that it provides flexibility in terms of the types of investments that can be held within it. TFSAs can hold a variety of investment products, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investment vehicles. This means that you can choose the types of investments that align with your financial goals and risk tolerance, and still enjoy the tax-free benefits of a TFSA.

Additionally, to cover a common misconception, a TFSA is not a specific investment product or fund itself, but rather a registered account with the government that provides tax benefits. This means that you can open a TFSA account with a financial institution, such as a bank or brokerage firm, and then choose the specific investment products that you want to hold within the account.


How much can I contribute to a TFSA?

The contribution room is determined by the Canada Revenue Agency (CRA) and is based on the annual TFSA contribution limit, which is set by the federal government. The contribution limit is subject to change, but it is typically indexed to inflation and rounded to the nearest $500. For example, in 2023, the annual TFSA contribution limit increase is $6,500.

To calculate your TFSA contribution room, you need to add up your unused contribution room from previous years and any new contribution room for the current year. For example, if you have never contributed to a TFSA before and you are a Canadian resident who was 18 years of age or older in 2009 (the year when TFSAs were introduced), your total contribution room in 2023 would be $81,500 ($6,000 for the current year plus the unused contribution room from previous years which gets carried forward).


Where do I find my TFSA contribution room?

To find your TFSA contribution room through the Canada Revenue Agency (CRA) portal, you need to follow these steps:

  1. Log in to your CRA account. If you don't have an account yet, you can create one by visiting the CRA website and following the instructions to register.
  2. Once you have logged in, navigate to the "My Account" section and click on the "Tax-Free Savings Account (TFSA)" tab.
  3. Your available contribution room for the current year will be displayed. This amount is based on the annual TFSA contribution limit set by the government, minus any contributions you have already made in the current year.
  4. To see your total contribution room, including any unused room from previous years, click on the "Contribution Room" tab. This will display your total TFSA contribution limit, as well as any contributions you have made in previous years and any withdrawals or transfers you have made from your TFSA.
  5. It's important to note that the CRA portal may not display your contribution room in real-time, as it can take some time for financial institutions to report TFSA contributions to the CRA. Therefore, it's a good idea to keep track of your contributions and withdrawals throughout the year to ensure that you do not exceed your contribution limit.


Can I have multiple TFSA’s?

Individuals are allowed to have multiple TFSAs, but they need to ensure that the combined contributions across all their accounts do not exceed the maximum allowable contribution limit set out by CRA. It is the responsibility of the account holder to monitor their contribution levels, as there are no warnings provided by the companies who hold TFSA’s to alert them when they are approaching or surpassing their contribution limit.


Why Do we Use TFSAs over Non-Registered accounts? 

In Canada, growth on non-registered or open investment accounts is subject to taxation, while growth in a TFSA (Tax-Free Savings Account) is not. This is why we aim to maximize your allowable TFSA contribution room before investing in a taxable investment. When you invest in a non-registered account, any interest earned, dividends received, or capital gains realized on your investments are subject to taxation at your marginal tax rate. This means that you will have to pay taxes on the growth earned in your non-registered investment account when you file your annual tax return.

On the other hand, when you invest in a TFSA, any growth earned in the account is not subject to taxation. This means that any interest earned, dividends received, or capital gains realized within the TFSA can grow tax-free, allowing your money to compound more quickly over time. Additionally, any withdrawals you make from the TFSA are also tax-free, making it a powerful tool for long-term tax-efficient investing.

It's important to note that there are contribution limits for TFSAs, and exceeding these limits can result in penalties. However, if you stay within the contribution limits, a TFSA can be an effective way to maximize your investment returns while minimizing your tax bill.

Misconceptions


More than just a savings account

A TFSA doesn't only need to be invested into a bank savings account because it is a versatile investment vehicle that can hold a wide range of investment instruments. While a bank savings account is a safe and low-risk option, it may not provide the best returns on investment. By investing in other types of investments such as stocks, bonds, mutual funds, ETFs, GICs, and other investment instruments, you can potentially earn higher returns on your money in a tax-sheltered manor.

Furthermore, the TFSA offers tax-free growth and withdrawals on all the investment instruments held within the account. This means that any interest earned, dividends paid, or capital gains realized within the account are tax-free, regardless of the type of investment instrument. As a result, investing in a TFSA can be an effective way to grow your money tax-free over the long-term.

Disclosure: This publication contains opinions of the writer and may not reflect opinions of the Advisor and Manulife Wealth Inc., Manulife Wealth Inc. (“Manulife Wealth Inc.”) and/or Manulife Wealth Insurance Services Inc. The information contained herein was obtained from sources believed to be reliable, no representation, or warranty, express or implied, is made by the writer, Manulife Wealth Inc. or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisors for advice based on your specific circumstances.